Transcript Document

VfM Management in infrastructure
projects – Fundamentals and
Strategies?"
PAUL Wanume
7/18/2015
PAUL WANUME
Presentation Objectives
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By the end, participants shall understand the
significance of VfM in managing public sector
infrastructure project development
Demonstrate how to construct and calculate
public sector comparator (PSC) and VfM models
Examine the overall strategic planning
requirements for identifying infrastructure project
opportunities
Create own VfM action plan that is applicable in
your organization
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Presentation Outline
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Overview
The Value For Money (VFM) concept – theory
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Meaning of VfM
Key elements of VfM
The role of the Public Sector Comparator (PSC)
and Shadow Bid Model (SBM) in VFM
assessment
The Value For Money (VFM) concept – Practice
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Organization
Value for Money test
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VfM : The Theory
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1. Overview
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Governments recognize the essential role
of the private sector as the main engine for
national growth. In line with this,
Governments have undertaken to use
private sector resources for the purpose of
financing the delivery of infrastructure
projects normally undertaken by
Government.
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Govts believe that the application of PPP in
the provision of public services and
infrastructure will bring about the following:
 Better utilization and allocation of public
funds
 More efficient development and delivery of
public infrastructure
 Ensure good quality public services
 Boost economic growth and foreign
domestic investment
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1.
As such Govts are promoting and encouraging
the various forms of PPP along various
convectional public expenditure in the
implementation of the NDP, Medium Term
Expenditure Framework and annual budgets.
Key drivers for the use of PPP to deliver quality
public infrastructure and services include:
Value for money – improved quality of
service and lower whole life cycle costs ie the
optimum combination of whole life costs and
service quality to meet user requirements.
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4.
Accelerated investment – doing more and
sooner, resulting in a faster rate of public
service improvement
Meeting public needs – providing quality,
reliable public services to meet the needs and
expectations of the community and promote
social inclusion
Reform & Change management – private sector
operator stimulating changes and development
of new work practices and ethics.
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Such partnerships can help make the best use of
the resources of both the public and private
sectors—including finance, experience, expertise,
and focus on delivery—to expand and improve
public infrastructure assets and services.
The potential to achieve greater “value for
money” than other procurement and delivery
models is the most important driver, if not the
primary factor for Govt’s decision to implement a
project as a PPP.
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2. VfM : Theory
What is Value for Money?
 The best available outcome after taking account
of all benefits, costs and risk over the whole life
of the project
 The optimum combination of whole-of-life costs
and quality (or fitness for purpose) of the good or
service to meet the user’s requirements
 Not lowest price
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VfM – what is it?
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……..a uniform process utilized on a case-by-case
basis to compare the aggregate benefits and the
aggregate costs of a PPP project against those of
the traditional public alternative.
For example, is it cheaper for a state agency to
build a road and charge drivers a toll, or to allow
a private company to take on the building costs
in return for rights to the toll revenues?
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Is it worth paying a price premium to a
private operator to take on risks in return for
establishing a reliable fixed cost into the
future?
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Why it is Used?
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Seek the best use of available
resources
Efficient and effective public service
delivery
“The competent authority uses VFM
reports as basic material to make a
judgment on whether to move forward
with the PPP project proposed by the
private proponent”
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Key elements of VfM
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VFM analysis typically involves a combination of
qualitative and quantitative analysis.
Qualitative VFM
analysis typically involves sense-checking the
rationale for using PPP—that is, asking whether a
proposed project is of a type likely to be suitable
for private financing and this often takes place at
a relatively early stage of PPP development
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Key Elements of VFM
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Quantitative : VFM is often a
comparative assessment
 Requires a benchmark cost : PSC
(Public Sector Comparator)
 PSC is a benchmarking and
evaluation tool : a Key tool
 Benchmarks the cost of government
service delivery
 Evaluates whether VFM is delivered
from bids
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In other words………
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Create a Public Sector Comparator which
estimates the whole-life cost of carrying out the
project through traditional approaches
Estimate the whole-life cost of the PPP
alternative (either as proposed by a private
bidder or a hypothetical “shadow bid” at the preprocurement stage)
Complete an “apples-to-apples” comparison of
the costs of the two approaches
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Key elements cont…..
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A Procurement principle, not only for PPP
Adopted by different countries to meet
government’s procurement practices
 Not a universal tool
Applied on a project or program basis
Innovation, asset utilization, risk sharing,
competition, service integration ate main key
drivers of VFM
 Presence of VFM drivers confirms suitability
for PPP
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Role of PSC
Purpose:
 Ensure the procurement method gives the best
value for money
 Promote whole life costing early in the project’s
development
 Assist in assessing the project’s affordability
 Provide a means for demonstrating VFM
 Provide a consistent benchmarking and
evaluation tool
 Encourage bidding competition
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The role of PSC
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A PSC is described as a whole-life, risk-adjusted
cost estimate of a project that is efficiently
delivered by the public sector.
During the development of a PSC, several
assumptions are made, including the assumption
that the public sector can complete the project to
the same quality and standards anticipated by
private sector delivery.
Developing a PSC requires a focus on
government costs and risks associated with
project delivery over the life of the project.
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The Role of PSC
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Promote whole life costing early in the
project’s development
Assist in assessing the project
affordability
Provide a means for demonstrating VFM
 Provide a consistent benchmarking and
evaluation tool
Encourage bidding competition
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PSC role ……
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Based on:
 Reference Project
 Risk analysis
 Cash flow over the life of the project
(inflation, cost, revenue, discount rate..)
 Government procurement costs to
asses project affordability
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The Shadow Bid Model
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A shadow bid model (SBM) is described as the
estimated cost to the public sector if the same
project were to be delivered by the private sector
as a PPP. A shadow bid is the public sector's
estimate of the bid price that it may receive if the
project is structured as a PPP.
The public sector typically uses financial and
statistical modeling techniques to develop the PSC
and the SBM for a project.
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A PSC and SBM can be developed during the
inception of the project business case and
feasibility study, prior to determining the
procurement method and issuing the solicitation.
After bids are received in response to an RFP,
the PSC may be compared to the actual bids
received to assess if VfM is still achieved prior to
awarding the contract as a PPP.
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VFM Assessment
NPV of Retained
Risk
NPV of
Transferable
Risk
NPV of
Competitive
Neutrality
QUANTITATIVE VFM
NPV of Retained
Risk
NPV of
PPP
Contract
NPV of
Raw PSC
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Retained Risk : The value of any risk that is not
transferable to the bidder
Transferable Risk : The value of any risk that is
transferable to the bidder
Competitive Neutrality : The value of the net
competitive advantage that a government
business has due to its public ownership
Raw PSC : Total of all capital and operating
costs and revenues under public sector delivery
of the project
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VfM assessment………
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Compare to PSC or between bidders
Presence of VFM confirms suitability for
PPP.
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VfM : The Practice
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Organization of a Research Team
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A VfM test is carried out by a multidisciplinary research team
Project Manager
 Experts with relevant skills and expertise
for the project are selected at the
preliminary stage
External experts (selected from human
resource pool)
 Demand forecasting
 Cost estimation: engineering companies
 Accounting: accounting firms
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Scope of a VfM Test
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Phase 1: Feasibility study (Decision to
Invest)
 The cost- benefit analysis is conducted to
determine feasibility of the project from a
national economy perspective.
Phase 2: Value for Money Assessment
(Decision on PFI)
 The Govt payment of PSC (Public Sector
Comparator) is compared against that of PFI
(Private Finance Initiative) to assess whether
the PFI achieves VfM.
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Scope Cont……
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Phase 3: Formulation of PFI
alternatives
 Based on the results of phase 2, an
appropriate PFI alternatives are
formulated
 The level of project cost, user fee,
subsidy scale, etc. are suggested from
the government.
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Phase 4: Award bonus points to the
initial proponent
 Bonus points (10% max.) awarded to the
initial proponent are estimated based on
the results of VfM tests and the quality of
the proposal.
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Setting Comparators for VFM Test
VfM Analysis Implementation Method
Setting
Private Finance
Initiate
Public Sector
Comparator
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Unsolicited
Unsolicited
With Public Plan
PFIp
(based on proposal)
PFIp (proposal)
PSCp
(estimated by
research
team)
PFIG (research
team)
PSCp (research
team)
PSCG (research
team)
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Solicited
PFIG
(research team)
PSCG
(research team)
Flowchart of a VFM Test - Unsolicited
Project Proposal(PFI0)
Construction of PSC(PSC0)
Phase 1
N
Feasibility analysis
Phase 2
Construction of PSC1, PFI1
Y
Phases
3&4
VFM test of private proposal
(VFM1=PSC1-PFI1≥0)
N
Y
PFI Alternative (PFI2*)
Construction of PFI2-i,
VFM test of PFI alternative
(VFM2=PSC1-PFI 2 * 0)
N
Calculation of bonus points
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Implementation of PPP Project PAUL WANUME
Rejection
Flowchart of a VFM Test (Solicited Project)
Construction of PSC (PSCG)
Phase 1
N
Feasibility Test (PSCG)
Y
Phases 2
Construction of PSCG1, PFIG1
VFM test (VFMG1)
N
Y
Phases
3&4
Construction of PFI Alternative
Implementation of PPP
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Rejection
Phase 1: Feasibility Study (1)
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Assess project feasibility and necessity
in the context of national economy and
policy directions
Cost-benefit analysis method is used to
assess the economic feasibility of a
project
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CBA is conducted in accordance with sectoral
guidelines (e.g. roads, railroads, ports,
seaports, dams, and environment facilities) for
PFS (Preliminary Feasibility Study)
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B/C ratios calculated based on
Estimation of demand, costs, and
benefits
 Sensitivity analysis
Policy analyses, if necessary, are
carried out
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Phase 1: Feasibility Study (2)
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Setting a PSC (Public Sector Comparator)
 Setting an appropriate PSC option is very
important both to feasibility and VfM of a
project
A basic assumption of VfM test (including
FS) is that the same level of service will
be provided by both PSC and PFI options
 In reality, a PSC option that is compatible
with PFI proposal is formulated
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Total, (risk adjusted) whole-of-life cost
of the project is estimated if
government is to undertake the project.
User fee and project cost of PSC are
not necessarily same as those of PFI
 The user fee of PFI is usually larger
than that of PSC
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Phase 1: Feasibility Study (3)
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Policy analyses are carried out if
necessary
Evaluation in qualitative/quantitative terms
whether the project is justified in relation to
relevant policy issues
Relevant policy issues: balanced regional
development; consistency with higher level
plan and policy directions; and
environment impact analysis, etc.
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The overall feasibility of a project is
assessed based on economic and
policy analyses
If the FS results demonstrate that
the project is feasible, then VfM
assessment ensues.
 If not, the VfM test process as a whole
is suspended recommends the
Competent Authority to reject the
project proposal.
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Phase 2: VFM Assessment (1)
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Government spending of the PSC is
compared against government payment
requested by PFI proposal to assess if
PPP procurement improves the value of
tax payer’s money
Features of VfM assessment
 It assists government making decision on
appropriate procurement options:
conventional public procurement vs. PPP
procurement.
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It provides a quantitative VfM level and
a justification for the decision on
procurement option.
 It provides a reliable benchmark and
specifies project scope.
 It encourages project appraiser to
consider risks early in the project
lifecycle, and address risk transfer
options in the bidding process.
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It reduces negotiation time and increases
the efficiency of bidding costs as the
scope of private sector bids are more
aligned with the
 public sector needs, and risk transfer
profiles.
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Phase 2: VFM Assessment (2)
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Cost items adjusted for competitive
neutrality Cost items adjusted for
competitive between PSC and PFI
options
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Revenue from user fee is deducted from
government payment of PSC
Revenue from supplementary project is
taken into account in consideration of both
options
VAT and other tax payments are adjusted
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Same amount and payment schedule of land
acquisition is applied to both options
Administrative costs incurred by governments
for project management are excluded from
both options
Insurance fee are estimated in different ways,
reflecting the difference in market valuation of
project risk by project owners
Additional government support if requested by
private company is included in both options
based on estimated spending
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Phase 2: VFM Assessment (4)
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GP(PSC) = Capital costs + operating
costs – Revenue
GP(PFI) = Construction subsidy +
Compensation costs + Additional
government support
 GP(PFI) is the government subsidy
requested by the private party in the
project proposal
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Phase 2: VFM Assessment (5)
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Qualitative VfM assessment
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Allocation of risks (construction, operation
risks, etc.)
Improvement of service qualities
And other ripple effects (positive externalities):
Promote the financial market through the
adoption of an advanced financial technique,
etc.
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Quantification of project risk transfer is not
satisfactory and those qualitative effects are not
incorporated into overall VfM assessment so far
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Phase 3: Formulation of PFI
Alternatives
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Financial analysis and sensitivity
analysis are carried out to assess the
profitability (bankability) of a project
Based on the VfM assessment and
financial analyses, PFI alternatives
including the following components, are
formulated:
 Total project costs
 User fee
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IRR (Internal Rate of Return)
 Total government payments
 Other components related to the
implementation of the project
The Competent Authority chooses the
most appropriate PFI option and invites
third parties to tendering
 If it is impossible to formulate a PFI
alternative that delivers VfM at a
reasonable level of IRR, then the PFI
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Phase 4: Bonus Points for Initial
Proponent (4)
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The VfM test team makes decision on
bonus points (10% max) to be awarded
to the initial proponents based on the
VfM(%) and quality of the proposal
The quality of a proposal is evaluated
based on the following criteria:
 Priority of the project in the mid- to longterm government investment plan (10
points)
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Composition of equity investors (10 points)
 Excellency of construction and operation
plan (30 points)
 Accuracy of demand forecast (30 points)
 Prior consultation with relevant
government agencies and plan of
addressing of civil complaints (10 points)
 Adequacy of required documentation (10
points)
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Use of VFM Test Results
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The VfM test sets the bottom line to
meet the condition of ‘VfM0’ in
selecting preferred bidder and
following phases of a project.
VfM reports are used as an important
reference when tender evaluation
committee conducts their work.
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VfM reports provide useful
information to prompt negotiation
process.
VfM reports are used as reference
when ex-post VfM tests are
conducted.
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